How is climate risk being incorporated into the prudential and risk-management framework?

Climate risk is treated not as a new risk type but as a driver of existing risks, through two channels: physical risk (damage and disruption from acute events and chronic change — affecting collateral values, insurance, operations, and credit) and transition risk (losses from the move to a low-carbon economy — policy, technology, and market shifts stranding carbon-intensive assets and borrowers). Supervisors (the ECB, Bank of England, and others via the NGFS) now expect firms to embed it: governance and board accountability, incorporating climate into risk appetite and credit/market/operational risk management, climate scenario analysis and stress testing (regulator-run exploratory exercises), data and metrics (financed emissions, exposure to high-risk sectors), and disclosure (TCFD-aligned, and now ISSB/CSRD requirements). The challenges are data gaps, long and uncertain time horizons that don't fit normal risk models, and methodological immaturity. The direction of travel is clear: climate is being integrated into ICAAP/risk frameworks and scenario analysis, with possible capital implications over time, rather than left as a sustainability-reporting afterthought.